From: Third Day Advisors, LLC [3da@comcast.net]
Sent: Monday, March 15, 2004 11:15 PM
To: rule-comments@sec.gov
Subject: SEC Proposed Rule S7-11-04 (Mandatory Redemption Fees)
Hello,
Listed below are several reasons why I oppose the proposed subject rule. The
bottom line is that this should be left up to the funds to 1) determine
whether they wish to impose a redemption fee, 2) determine how much it should
be, and 3) determine the proper holding period required for investors to
avoid the fee. I would support an approach which addressed these three items
and required every mutual fund to state their policy in the fund prospectus.
Sincerely,
Ken Whitley
Principal, Third Day Advisors, LLC
Beaverton, Oregon
a.. Mandatory redemption fees, if imposed, will detrimentally impact
millions of mutual fund investors who periodically reallocate their accounts
as well as many retirees who receive periodic distributions from their
retirement accounts. It is not these people who are the abusive traders of
mutual funds.
b.. Mandatory redemption fees penalize investors for managing risk in their
mutual fund accounts. In a study of the S&P 500 over the past 10 years,
there have been 404 occurrences where an investor waiting five days to avoid
a 2% redemption penalty would have experienced a greater than 2% loss. 46
occurrences would have resulted in losses from 5 to 10% while 5 of these
instances would have resulted in a loss of greater than 10%.
c.. Mandatory redemption fees will limit the ability of Registered
Investment Advisors to manage client accounts effectively depriving investors
of professional assistance. Periodic changes in fund positions for
rebalancing or changing asset allocations would have to be made on an account
by account basis to avoid incurring a redemption fee in instances where the
investors may have added or withdrawn funds recently. This will be
prohibitively time consuming and costly for advisors to administer.
d.. Most experts agree that better solutions to curb abusive short term
trading are fair value pricing and clearly stated policies on purchase and
redemption policies that are uniformly enforced.
e.. Mandatory fees should NOT be imposed by funds that do not have a
problem with abusive trading. The SEC's proposal amounts to price fixing.
Funds should have the discretion to decide whether or not investors should be
penalized to remedy a problem that may not exist.
f.. Any redemption fees, especially mandatory fees, should only be used to
recoup actual costs incurred by the fund by abusive traders. Data referred
to by the SEC in accounting for the costs of abusive trading on a portfolio
were over a decade old.